The Week Ahead Stock Market Update | August 1st, 2016

The change in leadership continued on Wall Street last week, as the Nasdaq outperformed the other major indices, with the help of several better-than-expected earnings reports from prominent tech names. Facebook (FB), Alphabet (GOOG), and Apple (AAPL), probably the three most successful tech firms currently, all beat expectations, propelling the Nasdaq to a new all-time high. The Dow and the S&P 500 lagged behind, as the energy sector and financials, two large components of the large-cap benchmarks, continued to underperform. Despite the mixed performance, the broad rally seems to be alive and well, although international worries continue to concern the Gorilla. Traders will have a busy schedule this week, with the release of the manufacturing and service PMIs, as well as the much-awaited jobs report on Friday.

Central banks took center stage again last week as both our own Federal Reserve and the Bank of Japan (BOJ) held its scheduled monetary meeting. Janet Yellen and the Fed didn’t surprise investors, as the bank left the benchmark rate unchanged. The BOJ, on the other hand, delivered a shocking statement in which Mr. Kuroda expressed concerns regarding the viability of the bank’s quantitative easing program, and its negative interest rate policy. The statement caused violent moves in Asia on Friday, as traders expected some form of additional stimulus from the BOJ. The lackluster U.S. GDP print, 1.2% versus the consensus estimate of 2.6%, also weighed on stocks in the last session of this “consolidation-week.”

The technical picture deteriorated somewhat during the last week of July, but the overall picture is still undoubtedly bullish. The major indices remained above their prior long-term “trading ranges,” after breaking out from them just two weeks ago. The Dow dipped below the rising 50-day moving average, but the S&P 500 and the Nasdaq are still above both the rising 50-day and 200-day moving averages. The Russell 2000 continued to outperform the large cap benchmarks, as it also stayed above its short- and long-term moving averages. The Volatility Index (VIX) got close to 14 during the week, but it fell back to its prior weekly close near 12 on Friday; signaling a low level of fear among investors.

Market internals remained supportive of the bullish case, but the Gorilla noticed a slight downtick in some of the broader based indicators, warning of a possible short-term correction. The Advance/Decline line continued its encouraging march to new highs last week, as advancing stocks outnumbered declining issues by a 3-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The number of new 52-week highs increased to 234 issues on the NYSE and 148 on the Nasdaq, while the average number of new lows rose slightly to 11 on the NYSE and 29 on the Nasdaq. The ratio of stocks above their 200-day moving average turned lower last week, as some sectors started to weaken, but the reading of 70% on Friday still points to a healthy bull market.

The short-covering trend that started three weeks ago continued, as the majority of the most shorted stocks on the NYSE and the Nasdaq saw their short interests decline again last week. Insys (INSY) is still at the top of the list, with a short interest of 72%, despite the 40% rally in the shares since late June. Last week’s new entry, Cliff Resources (CLF,) fell out of the top 10 following the company’s earnings report, as the short interest dropped to 37% from 43% a week ago. Online lender LendingTree (TREE) also released its quarterly numbers, and the short interest dropped to 47% from 51%, as the stock rallied by 10% after the report. Western Union (WU) now has the highest day-to-cover ratio (DTC) of 23 among large caps, as the payment company surpassed Verisign (VRSN) (DTC of 21) on Friday.

Stocks ended a hectic July that has been way more volatile than your average summer month on Wall Street. The powerful rally that followed the “Brexit-scare” might provide hope for bulls that the worst part of 2016 is behind us. Traders think that the Fed will continue to support the economy and the market following the negative GDP surprise. The so far modest, although certainly less than stellar, earnings season will still provide valuable information about the economy, as Procter & Gamble (PG), Pfizer (PFE), and Berkshire Hathaway (BRK-A) will all release their numbers this week. The Olympic Games start this Saturday in Rio, and the Gorilla hopes that Team USA will provide more excitement than stocks in the coming weeks, and that the indices will stay on the bullish track in August. Stay tuned for an eventful week!